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Citigroup to pay $7 billion to settle mortgages probe

Citigroup Inc. will pay $7 billion to settle the U.S. government's accusations that the bank misled investors about the quality of mortgage securities it sold in the run-up to the financial crisis.

The Justice Department said Monday that Citigroup knowingly sold mortgage-backed securities with loans containing "material defects" and concealed that information from investors in what Attorney General Eric Holder described as "egregious" misconduct that helped fuel the 2008 financial crisis.

The settlement, which includes a $4 billion civil penalty, doesn't absolve Citigroup or its employees from facing any possible criminal charges, Holder said. He declined to say whether the government was pursuing criminal charges.

Citigroup admitted to many of its misdeeds "in great detail" the Justice Department said. A statement of facts released by the government — and agreed to by the bank — detailed a pattern of the bank repeatedly ignoring its own red flags about subpar mortgages and making misrepresentations to investors about the quality of loans being securitized.

Despite knowing the underlying mortgages were problematic and might wind up in default, Citigroup pooled the loans into residential-mortgage backed securities and sold them to investors, the government said.

"Citigroup employees often personally ordered the due diligence firms to change the loan grades ... from reject to accepted," said Colorado U.S. Attorney John Walsh.

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In all, the Justice Department uncovered 45 mortgage-security deals in 2006 and 2007 in which the bank made misrepresentations about the quality of the underlying loans, said Loretta Lynch, the U.S. attorney from Brooklyn.

"Our teams found that the misconduct in Citigroup's deals devastated the nation and the world's economies, touching everyone," Lynch said, adding the harmed investors included public pension funds, states, cities, religious charities, and hospitals.

To resolve the probe, Citigroup will pay a $4 billion civil penalty to the Justice Department, plus $500 million to the Federal Deposit Insurance Corp. and several states. Citigroup also agreed to spend $2.5 billion on "consumer relief," where it will get credit for modifying mortgages for struggling homeowners and similar actions.